Planning on making a gift to or leaving an inheritance for a minor child (generally defined as someone under age 18)? How can you ensure that your hard-earned dollars will be available to, yet protected for, your intended beneficiary?
What are the UTMA/UGMA?
The Uniform Transfer to Minors Act (UTMA) is a model law which allows ownership to pass to a child through a custodian who holds, manages, and protects the property for the benefit of the child. The UTMA has been enacted, in some form, in all states except South Carolina. It applies to any type of property, updating the Uniform Gifts to Minors Act (UGMA), which applied only to securities, cash, and other personal property. UTMA rules and procedures are governed by state law (check yours for more details).
How do the UTMA/UGMA work?
The account creator (typically a parent, grandparent, or other family member) names an adult to serve as custodian for the benefit of the child until the child reaches a specified age, which ranges between 18 and 25 depending upon state laws and circumstances surrounding the contribution (i.e., was it a lifetime gift or an inheritance?). California sets a default age of 18 unless the account specifically states a later age. A gift may be delayed to age 21 whereas an inheritance may be deferred to age 25.
Benefits of the UTMA/UGMA
The custodian has a legal obligation to invest, manage, and apply custodial property exclusively for the child’s benefit. In this sense, the custodian acts like a trustee of a trust, though in a less formal manner. The child may not directly access or sell the property until the custodianship terminates. This arrangement is generally preferable to a court-ordered and supervised guardianship, which would otherwise be required if an inheritance is left to a minor without provision for a trust or custodial account.
Drawbacks of the UTMA/UGMA
When the child reaches the age of majority (or other stated age), the child takes control of the asset and may spend it without restriction. In contrast, the trustee of a trust may be granted discretion to decide when the child has sufficiently matured. A trust may also be used to impose stricter rules. For example, you may want to direct that your financial contribution be applied to the child’s education, health emergencies, first home purchase, business endeavors, or other specific purposes.
How do I choose?
Contact me for legal guidance if you are thinking about giving property to or leaving an inheritance for a child. There are many factors to consider. With 18 years’ experience designing estate plans and, more importantly, handling trust & estate administrations on the back end, I can help you make the best choice for you and your loved ones.